Comcast to fund development for additional platforms, including Scientific Atlanta set top boxes

Announced ‘Buy on Box’ capability for Amazon Unbox(TM) service

Net loss was $17.7 million, including a standard definition product inventory related write-down of $11.2 million

Adjusted EBITDA loss was $11.2 million, also including the standard definition product inventory related write-down of $11.2 million

Service and Technology revenues were $56.5 million in the second quarter

As a geek, I’m more interested in the products and technologies than the financials. Reading through the press release, one of the first things I noticed is that Comcast has agreed to fund further development of the OCAP software to bring it to additional platforms beyond the Motorola DVRs, including Scientific Atlanta DVRs. That’s significant and it opens up possibilities for TiVo in SciAtl markets.

Probably obviously, the TiVo HD will be TiVo’s main focus going forward. The TiVo HD is still being subsidized in the retail channel but at reduced levels compared to the older SD boxes, and it has basically no subsidy in direct sales. Which would mean TiVo’s costs on the HD are around $300. The lower, or eliminated, subsidies mean TiVo’s subscriber acquisition costs will drop and that’s good for business. Retailer orders for the HD are promising and more retailers will be carrying the TiVo HD than had been carrying past units, such as CostCo and Sears.

TiVo on Comcast is continuing to progress well and Comcast stated:“we will commence the TiVo rollout process shortly, which will continue rolling out throughout the fall in Comcast’s New England Division including metro Boston, Southeast Massachusetts and New Hampshire.” Tom Rogers, quoting a ‘very senior’ person from Comcast said “You’ll see some real action in September and even more action in October in the roll-out front.” And, as I said above, Comcast is funding additional development for more platforms, which indicates a strong commitment to the product.

Rogers made a few comments relating to DirecTV during his statements and the Q&A, and he danced around anything beyond the previously announced feature updates coming in 2008. It was mention that, in addition to the user-centric features that were announced, updates to the advertising platform – bringing DirecTiVos inline with offerings on the standalone products – will be part of the update. But, reading between the lines, based on what he said and emphasized, as well as what he didn’t say, I think TiVo and DirecTV are in discussions for new products going forward and we might hear something about new TiVo-based DVRs down the road. That might not pop until early next year, since I doubt they’d be able to engineer a product and have it out this year, and neither TiVo nor DirecTV would want to poison holiday sales of their current products with people waiting for a product. Personally I’m starting to think a new box is more likely than not.

They slipped a new feature announcement in their subtly, in the context of Amazon Unbox:“With the upcoming addition of progressive downloading, subscribers will be able to easily and quickly find, download and begin viewing almost immediately the content that they want, when they want.” I believe this is the first time we’ve ever heard about progressive downloading as a coming feature. What this means is that, unlike today where TiVoCast and Unbox downloads need to finish downloading before they can be watched, you’d be able to start watching a download as soon as it begins. And the only restriction would be your download speeds – as you’d need the download to out-pace the viewing speed. This is a nice addition, I hope we see it before the end of the year.

They also confirmed that the HD TiVo hardware being developed for Australia will be based on the DVB-T standard and that TiVo plans to leverage that development work for platforms for the other DVB-T markets. And Cablevision Mexico is expected to begin distributing TiVo units to its customers within the next week or two, so that deal is moving forward rapidly.

One thing I was hoping to hear mentioned, that wasn’t, was Switched Digital Video (SDV). I thought surely someone would ask about it, the potential impact on TiVo’s sales, and the proposed solution from the NCTA during the Q&A – but no one did.

TiVo’s financial results were badly hurt by the cost of an inventory write-down and inventory charge related to the Series2DT product. Their net loss was $17.7 million, or $0.18 cents a share, with $11.2 million coming from the charges. Without the charges the loss would’ve been $6.5 million, and around $0.06 cents a share, which is closer to the 5-cents the street expected. Despite the unexpected expenses, TiVo is maintaining their stance of Adjusted EBITDA breakeven for Fiscal 2008.

Mr. Rogers continued, “Increased consumer demand for high definition products, which accelerated retailers’ movement toward high definition sales, resulted in a continuation of the tepid trend in standard definition sales. Consequently, we ended the quarter with higher than anticipated inventory levels of long-lead time components and parts related to our standard definition product. Because of the continuing HD trend, it was prudent to reserve against this long-lead time inventory. It is noteworthy that the analog basic cable market as well as homes currently not looking to upgrade to high definition television present an opportunity for us as the TiVo standard definition product is the only option for the these approximately 30 million homes where DVRs are desirable. We are not abandoning this space, but have to re-focus our marketing efforts to reach this consumer since retailers are now fully focused on HD.”

It sounds like sales of the S2DT fell off much faster than expected and retailers aren’t picking up additional inventory of the SD products, focusing instead on the TiVo HD. So TiVo had to cut back, perhaps stop, manufacturing of the S2DT. Which is what created the charges. Based on comments on the call, TiVo is not abandoning the analog market, and they’re still getting ~50% of new subscribers from the analog market. But they’re going to be looking at new ways to market to analog users, and it sounds like they’ll be doing so from existing inventory. So it could mean that the S2DT is effectively out of production, and once current inventory sells out it will be gone. I think that’s logical – the TiVo HD is an effective replacement for the S2DT, and the HD’s cost, and price, should come down over time so by the time the S2DT is sold out it may be better positioned to take over. (And then there is the mysterious TCD653080 part number and those unused analog input traces on the HD’s board.)

TiVo saw 41,000 gross additions of TiVo-owned subscribers, but a net loss of 19,000 TiVo-owned subscribers, along with a net loss of 126,000 DirecTV subscribers, on a churn of 1.2%. TiVo attributed most of the losses to the rapid shift in the market to HD, causing existing TiVo subscribers to leave TiVo for HD DVRs – remember the TiVo HD launched just days before the end of the quarter, so it had no significant impact on subscriptions, but it is expected to drive subscriptions going forward. Current subscriber levels stand at 1.708 million TiVo owned (up from 1.572 a year ago), and a total (including DirecTV) of 4.197 million (down from 4.418 a year ago – mostly due to DTV losses, obviously). 59% of subscribers are paying recurring fees, up from 53% a year ago, which is good for TiVo. ARPU (Average Revenue Per Subscription) for TiVo-owned subs is up to $9.08 a month, from $8.82 a year ago, while DTV subs are down to $0.86 from $0.96. Roughly 180,000 subscriptions are lifetime subs which have passed their 4-year mark, meaning they no longer generate subscription revenue for TiVo.

For me the big news items from the call are progressive downloads and Comcast’s funding of further OCAP development, especially for SciAtl. And the implication that things are afoot with DirecTV for additional work above and beyond what was announced.

About MegaZone

MegaZone is the Editor of Gizmo Lovers and the chief contributor. He's been online since 1989 and active in several generations of 'social media' - mailing lists, USENet groups, web forums, and since 2003, blogging. MegaZone has a presence on several social platforms: Google+ / Facebook / Twitter / LinkedIn / LiveJournal / Web. You can also follow Gizmo Lovers on other sites: Blog / Google+ / Facebook / Twitter.